Hong Kong and Macau have been key assets for
Mainland China for the last few decades; over this time period, these two
regions have acted as economic bridges, connecting China to the international
market (pre-significant economic reform). 
In this paper I will analyze the current status of both Hong Kong and
Macau as economic bridges linking China to the international market.  I will discuss the current state of economic
integration between Hong Kong, Macau and Mainland China and how this
integration will continue to be beneficial for the Mainland and both special
administrative regions (SARs).  My
analysis focuses on the economic integration of these three areas starting in
the late 1970s, because that is when Mainland China began to radically
liberalize its economic policies and opened up to the international
market.  These economic reforms served as
the catalyst for economic integration between Hong Kong, Macau and Mainland
China.

The different “fabric” that makes up the
economies of Macau and Hong Kong helps to understand why each region
contributes a different type of integration link for China.  In Macau, it is the tourism and gambling
industry, whereas in Hong Kong, it is the banking, investment and trade sectors.  These different economic compositions,
coupled with a historic and unprecedented health event, have fortified the
status of Hong Kong and Macau as economic bridges to China.  Of the two, the Hong Kong economy has emerged
as stronger and more suitable for international trade relationships.  Accordingly, Hong Kong has rapidly developed
into a sort of middleman of China since the beginning of the economic reforms
initiated by China in the late 1970s. 

Historical Information on Hong Kong and Macau

Hong Kong and Macau are currently two special
administrative regions (SARs) of the People’s Republic of China (PRC).  These two territories have a unique history
with longstanding connections to Europe. 
Both Hong Kong and Macau were previous dependencies of, respectively, the
British Empire and Portugal and returned officially to the People’s Republic of
China (PRC) in the 1990s.  The unique
colonial histories of Hong Kong and Macau have allowed both territories to have
historically special positions in the international community as bridges
between the East and the West.

Hong
Kong

Hong Kong became a colony of the British
Empire immediately following the First Opium War.  In 1997, China resumed sovereignty of Hong
Kong.  This unique history has allowed
Hong Kong to have a special position in the international system as a bridge
between the East and the West.

            On 19
December 1984, the respective prime ministers of both the PRC and the United
Kingdom signed the Joint Declaration of the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of the People’s Republic
of China on the Question of Hong Kong. 
This agreement is also known as the Sino-British Joint Declaration.  This document discussed the return of Hong
Kong to the PRC as a special administrative region (SAR) in 1997.

“The
Hong Kong Special Administrative Region will be directly under the authority of
the Central People's Government of the People's Republic of China. The Hong Kong
Special Administrative Region will enjoy a high degree of autonomy, except in
foreign and defence affairs which are the responsibilities of the Central
People's Government” (http://www.cmab.gov.hk/en/issues/jd2.htm).

This declaration specified
that the laws and legal system, which were enforced in Hong Kong at the time,
would remain unchanged.  Additionally,
and perhaps most importantly, this joint declaration allowed the social and
economic systems in Hong Kong to remain unchanged.  This meant that Hong Kong could maintain its
capitalist economic system for at least fifty years after its return to the PRC
(up until 2047).

Macau

From the mid-16^th century up until
1999, Macau was administered by Portugal. 
After the arrival of the Portuguese hundreds of years ago, Macau became
open to international trade and investment. 
The city was once one of the most important ports for foreign trade in
southern China, however it became overshadowed by Hong Kong when it became a
colony of the UK (Yao 53).

Similarly to the agreement made with the UK
about the Question of Hong Kong, the PRC negotiated with Portugal with respect
to Macau’s return in 1999.  The
Sino-Portuguese Joint Declaration, formally known as the Joint Declaration of
the Government of the People's Republic of China and The Government of the
Republic of Portugal on the Question of Macao, was signed in Beijing in
1987.  Just as the aforementioned
declaration for Hong Kong, the Sino-Portuguese Joint Declaration allowed Macau
to maintain its capitalist economic system and its legal system, thereby
maintaining a high degree of autonomy for at least fifty years after its return
to the PRC (http://bo.io.gov.mo/bo/i/88/23/dc/en/).  Macau was the first and last European colony
in Asia. 

            The
handover of Macau in 1999 resulted in new growth and economic development in
Macau with respect to the liberalization of the local economy, particularly
with respect to the gambling sector.  The
new SAR government reformed the old Portuguese administrative system.  The most notable move to liberalize the
economy was introducing competition to the monopolized telecommunications and
gambling sectors.

            Rather
than principally identifying itself as a window or gateway to China, Macau
identifies itself more as a tourist location for vacation and leisure.  Macau is the only place in China which has
legal, government-regulated casinos. 
Casinos have legally operated in Macau ever since the beginning of the
19^th century and the gambling sector of the Macanese economy has
become the most important source of revenues for the local government.  Casino visitors come “mainly from Hong Kong,
Japan, the US and Europe, with Hong Kong being the most important market” (Yao 54).

In 2000 and 2001, the telecommunications and
gambling industries were both opened by the Macanese government.  Immediately following this economic
liberalization policy, incoming foreign direct investment dramatically rose,
which helped the territory to recover from a recession.  This inflow of foreign direct investment
helped fully recover the Macau economy, and dramatically improved new business
potential and a double-digit growth to the territory.  “In line with the economic reforms, the
number of Chinese visitors to Macau’s casinos increased and contributed to the
recovery of the gambling sector” (Yao 9).

Chinese Economic Reforms: A Breath of Fresh Air

            China
pursued dramatic economic reforms starting in 1978, which utilized capitalist
market principles.  These reforms were
under the name “Re-adjustment, Reform, Consolidation and Improvement,” with the
ultimate goal of resolving imbalances in the Chinese economy.  The primary goals of these economic
development strategies were to encourage the inflow of foreign capital and
resume its economic connections with the outside world.  “Hong Kong and Macau, as well as Taiwan, were
then regarded as the stepping stones in the liberalization process, and a
number of preferential policies, including the formation of special economic
zones (SEZs) were initiated toward these economies so as to attract their
investments” (7).  These special zones
were established in order to generate external funding, which would in turn
spur more economic development. 

            However,
China’s economic liberalization policies faced significant challenges,
particularly due to the country having minimal experience with operating under
a market system (capitalist) economy. 
Additionally, international investors were hesitant to do business with
the country.  As such, it was necessary for
China to find a middleman or stepping stone in order to overcome these challenges
to reform.  This situation allowed Hong
Kong to be considered as a window to China.

 

Impact
of Economic Reform in China on the Hong Kong Economy

            Following
the drastic economic reforms implemented by China, Hong Kong’s role as the
international bridge to China intensified. 
Hong Kong “served as a stepping stone in the entry of foreign products
and capitals to the nearly opened-up China market” (Yao 42).  Hong Kong’s economy shifted from
industrial-based to service-based following China’s economic reforms.  The territory’s trade, construction, banking
and finance sectors grew dramatically and became key components of the new
economy.  A complementary economic
relationship formed between China and Hong Kong due to Hong Kong’s
specialization “in the provision of business, trade, banking and financial
services to facilitate the economic transition and development of China” (Yao
42). Hong Kong-provided services varied widely from sales services to venture
capital funding, to quality control. 

The impact of the major economic reforms
implemented by China was extraordinarily positive for Hong Kong.  Unlike Macau, which was characterized by an
underdeveloped banking sector and the absence of a financial market, Hong Kong
had a mature infrastructure to support trade, banking and finance.  Hong Kong thus flourished, and quickly became
a “fundraising” center for China.  But it
would take an unprecedented and extraordinary health episode to boost the
economies of HK and Macau even further. 

In late 2002, the Severe Acute Respiratory
Syndrome (SARS) epidemic broke out in Macau and quickly developed into a
pandemic, spreading through the region, and creating worldwide concern.  Despite the zero infection record in Macau, the
pandemic had a devastating effect on its economy, heavily reliant on tourism,
because visitors lost their confidence to travel there.

For a period of almost two years, the eyes of
the world in general, and those of the international medical community in
particular, were focused on the region. 
By 2004, when the pandemic was finally controlled, the disease had
seriously affected the economy of both Hong Kong and Macau.

“SARS could be seen as a turning point for
the Hong Kong economy as the mainland Chinese government attempted to introduce
a series of preferential policies to support the post-SARS economic recovery of
Hong Kong...In order to accelerate the recovery process of both special administrative
regions, the Chinese government introduced the preferential Closer Economic Partnership
Arrangement (CEPA) and the ‘free-to-go’ policies” (Yao 43).

The ‘free-to-go’ policy consisted of tourist
arrangements under which Chinese citizens from some major cities were allowed
to visit Hong Kong and Macau more conveniently than ever before.  The CEPA
allowed selected categories of goods and services produced or provided by Hong
Kong and Macau to be exported to China without tariff and trade restrictions.

The ‘free-to-go’ arrangements and the CEPA
had a dramatic impact on both territories, but this impact was felt in
different parts of their respective economies. 
In Macau, the impact was mostly visible in the tourism and gambling
industries.

“Following the liberalization of the gaming
industry, the introduction of a ‘free-to-go’ arrangement to allow Chinese
citizens to visit Macau on an individual basis in late 2003, and the completion
and grand opening of new foreign-invested casinos in 2004, millions of Chinese
and Hong Kong tourists have been visiting Macau to bring about a record high
level of incoming tourists and a strong flow of foreign demand to the
territory.” (9)

In Hong Kong, the impact was mostly felt in
the banking, trade and investment sectors. 
The free trade agreements consolidated Hong Kong as a magnet for foreign
investment ultimately destined for China. 
“The CEPA affects Hong Kong
investments.  For U.S. traders, investing
in a Hong Kong firm right now might be your best bet into China as the CEPA
enhances the ability for Hong Kong businesses to get into the Chinese market
with greater ease than any other nation ” (http://www.tid.gov.hk/english/cepa/legaltext/files/sa8_main_e.pdf).  It
is in this respect that Hong Kong has strengthened its position as the bridge
between China and foreign economies.

Conclusion

Both Hong Kong and Macau share a fascinating
history, and the study of their economies is enormously enriching.  Their economies vary in their composition,
with Macau boasting a strong tourism and gaming industry while Hong Kong has a
mature trade, banking and finance infrastructure.  Each territory offers a strong bridge to
Mainland China, based on the strength of their respective economies.

But China is the world’s largest economy, and
it is undeniable that the world, particularly the West, is interested in
investing in China to reap the benefits of what appears to be unstoppable
growth.  Although the growth of the
Chinese economy has slowed down a bit over the past few years, this growth is
still larger than that of any African economy or that of any other Asian or
South American nation.  As such, any
“bridge” that can facilitate entry into the Chinese market, either in the form
of foreign investment or technology, is likely to be seen favorably by the
West.  For this reason, it is my opinion
that, of the two, Hong Kong represents today the stronger and more viable
bridge into China.

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